IOS 2024 Summary
Institutionalization of IOS
2024 marked a turning point for the Industrial Outdoor Storage (IOS) sector, driven by heightened investor interest and increased institutional participation. A notable example was the Peakstone acquisition of an Alterra IOS fund, signifying the growing recognition of IOS as a valuable asset class. Nationwide activity surged, underscoring the expanding appeal of this niche market.
One significant development in 2024 was the evolving classification of IOS assets. Municipalities continue to scrutinize the use, making zonings restrictive, restrictions, often mandating site improvements to comply with new standards. At the same time, tenants have begun to demand enhanced yards and building specifications to meet their operational needs. These evolving requirements are expected to drive rent increases and spur new developments in growth markets throughout 2025. This will also create further flight to quality.
Investor Demand and Market Dynamics
Investor demand for IOS remains robust, bolstered by favorable long-term market dynamics. Increased capital expenditure requirements (forced by flight to quality and stringent zoning regulations) create high barriers to entry, ensuring supply constraints in key in-fill markets. Despite a low national vacancy rate of approximately 2.7%, the rising cost of capital has begun to impact the market. Federal Reserve policies have led to a 36.6% decline in the square footage under construction, slowing tenant expansion and decelerating net absorption of new developments.
Tenant demand remains strong. With interest rates remaining high throughout 2024, development was prohibited, forcing competition for the limited supply in the market. This dynamic further contributed to favorable rent growth and heightened activity in established markets. Investor demand is increasingly focused on growth markets and pivotal logistical locations such as highway systems, ports, and intermodal hubs, where the strategic advantages amplify the value of IOS assets.
Policy changes also loom large over the IOS sector. The incoming administration’s proposal to impose tariffs on all imported goods could significantly reduce cross-border traffic, particularly affecting truck parking. In response, international manufacturing companies have started reevaluating site selection strategies to address potential challenges.
Dallas: A Market in High Demand
The Dallas IOS market experienced significant transaction volume in 2024, driven by strong demand from the logistics, e-commerce, construction, and transportation sectors. The region’s expanding supply chain infrastructure, coupled with limited land availability in prime locations, fueled rising rental rates. High-demand submarkets such as South Dallas, areas near DFW International Airport, and the I-45 and I-30 corridors saw the majority of activity. Institutional investors and regional developers were particularly drawn to the market, enticed by stable income potential and escalating demand for outdoor storage space.
Leasing activity remained vibrant, with companies increasingly opting for short-term, flexible leases to address fleet parking, equipment storage, and project-based requirements. Prime locations commanded premium rental rates, though exact figures remain to be detailed. Despite challenges like rising construction costs and interest rates, pre-leasing deals mitigated development risks, ensuring sustained market appeal. However, land scarcity and escalating costs could temper new development in 2025.
Fort Worth: A Resilient Market
Fort Worth’s IOS market witnessed increased activity in the latter half of 2024. While new construction starts declined compared to earlier quarters, net absorption surged in Q3, leading to a notable drop in vacancy rates. Rent growth slowed overall but remained strong for well-located in-fill facilities, benefiting from high transportation and construction costs, demand in submarkets like Alliance, and zoning changes limiting supply in areas such as southeast Fort Worth.
Market rents for in-fill IOS climbed to an average of $5,500 per acre per month, reflecting a $500 increase from earlier in the year. In contrast, rental rates for assets in outlying areas remained flat. As the trucking and freight recession concluded, demand for IOS assets rebounded, with contractors and suppliers stockpiling inventory to hedge against potential tariff-related cost increases. Fort Worth, as a key intermodal distribution hub, is poised for further growth in 2025, supported by its strategic positioning and robust market fundamentals.
Conclusion
The IOS sector continues to exhibit strong potential, driven by institutional investment, tenant demand, and evolving market dynamics. While challenges such as rising capital costs and policy uncertainties persist, the sector’s high barriers to entry and constrained supply create a favorable environment for sustained growth. With key markets like Dallas and Fort Worth leading the charge, the IOS market is well-positioned for another dynamic year in 2025.
